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Income Tax Appellate Tribunal, Hyderabad ‘ B ‘ Bench, Hyderabad
Before: Shri S.S. Godara & Shri Laxmi Prasad Sahu
IN THE INCOME TAX APPELLATE TRIBUNAL Hyderabad ‘ B ‘ Bench, Hyderabad
Before Shri S.S. Godara, Judicial Member AND Shri Laxmi Prasad Sahu, Accountant Member
ITA Nos.186 to 189/Hyd/2021 and SA Nos.36 to 39/Hyd/2021 Assessment Years : 2014-15 to 2017-18 M/s. Vivimed Labs Vs. The Asst.Commissioner of Limited, Income Tax, Hyderabad. Central Circle – 2(3), PAN : AAACV6060A. Hyderabad. (Appellant) (Respondent) Assessee by: Shri P. Murali Mohan Rao, Advocate. Revenue by: Shri Y.V.S.T. Sai – CIT DR. Date of hearing: 12.02.2022 Date of pronouncement: 12.04.2022 O R D E R Per S. S. Godara, J.M. These assessee’s four appeals for A.Ys 2014-15 to 2017-18 arise against the Asst. Commissioner of Income2Tax, Central Circle - 2(3), Hyderabad’s assessments; all dt.29.03.2021, framed in furtherance to the Dispute Resolution Panel (“DRP”) – 1, Bangalore’s directions; all dt.25.02.2021 in F.Nos.123 to 126/DRP-1/BNG/2019-20; respectively, involving proceedings u/s 143(3) r.w.s. 144C(13) rws 153A of the of Income Tax Act, 1961 [in short, ‘the Act’].
ITA Nos. 186 to 189/Hyd/2021
Heard both the parties. Case files perused.
We advert to the various identical issues in the assessee’s instant four appeals. It’s first substantive grievance common in all these four assessment years is that the learned lower authorities have erred in law and on facts in making Arm’s Length Price “ALP” adjustment of Rs.18,31,62,550/-, Rs.10,50,45,151/- Rs.16,41,02,540/-; and Rs.2,01,88,555/-; assessment year wise; respectively pertaining to advances made to associated enterprises. We note with the able assistance coming from both the sides that the assessee’s case all along has been that its corresponding advances to the overseas Associated Enterprises “AEs” had been made for the purpose of equity investments followed by allotment of corporate stake therein than loans simplicitor. Learned counsel further submits that the assessee has also filed copies of corresponding share allotments before the learned lower authorities. We note that this has been very much a recurring issue between the parties wherein the learned co-ordinate bench’s earlier order involving assessee’s appeal ITA No.212/Hyd/2016 for A.Y. 2011-12 has restored the matter back to the Transfer Pricing Officer “TPO” as follows :
“5. As regards ground no.3, the brief facts are that during the transfer pricing proceedings, in the T.P. documentation of assessee, the AO found that the assessee had stated that it had provided working capital advance of Rs.252.06 million to Vivimed Hong Kong and also of Rs.8.41 millions to Vivimed, US i.e. total amount outstanding was Rs.26,01,90,000/- and it was stated that the advance is for administrative convenience and there was no interest accrued during the year and hence determination of ALP is not warranted. AO noticed that assessee had not charged interest from it’s A.E. though interest @ 6% was charged from Vivimed Hongkong in the earlier year, and also that there is no interest charged in this year. Therefore, he proposed to charge interest on the outstanding balances and the taxpayer was issued a letter accordingly. After considering the assessee’s submissions at length, the AO held that the interest is chargeable on the interest free advances given by the assessee to its subsidiaries
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towards working capital advances. Thus, he charged 12.25% on the working capital advances as rate of interest and brought it to tax. 5.1. Further, he also treated corporate guarantee as an international transaction and proposed addition by charging corporate credit at 2% of the corporate guarantee given by assessee. In accordance with these findings of the TPO, the final assessment order was passed and the assessee has filed second appeal before the Tribunal. 5.2 The Ld.Counsel for the assessee submitted that though TPO has stated that these are working capital advances given to its subsidiaries, they are not advances but are the investments made by assessee in the equity of its subsidiaries and the said companies have also subsequently allotted shares to the assessee. 5.3. Ld.DR, on the other hand, supported the orders of the authorities below and drew our attention to the paper book filed by assessee wherein in its letter addressed to the AO, the assessee had clearly stated and that it had advanced working capital to its sister concerns. Therefore, according to him, the advances were not equity at all. He further submitted that documents filed by assessee towards investment such as board resolutions and evidence of allotment of shares to assessee were never filed before the authorities below nor does the assessment record show that they were on record. Therefore, according to him, these evidences should not be considered at all. 5.4. Having regard to the rival contentions and the material placed on record, we find that the assessee, not only in its T.P. documentation, but also in its reply to notice of the TPO, has clearly stated that these are working capital advances, though at para 2.5 of its submissions before the TPO, assessee had stated that it had invested in its sister concerns. However, neither the TPO nor the DRP have gone into this aspect, nor has the assessee filed any evidence in this context before the authorities below. The board resolutions and the evidence that assessee has been allotted equity shares in the subsequent year were never put before the authorities below. In view of these facts, we deem it fit and proper to set aside the issue to the file of AO/TPO with a direction to consider the evidence filed by assessee to the effect that assessee had invested money in equity shares of its subsidiaries and has not given working capital advances and if it is found that these transactions were in fact investments in equity shares of the subsidiaries, then no T.P. adjustment shall be made. However, if it is found that the funds transferred by the assessee to its subsidiaries during the year were working capital advances, which were later decided to be treated as investments, then the
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T.P. adjustment already made by the AO shall be revived and the assessment shall be completed accordingly.”
Mr. Sai fails to pin-point any distinction on the relevant facts involved in all these assessment years since the learned lower authorities have adopted consistency in making the impugned adjustment. We therefore adopt the foregoing detailed discussion mutatis mutandis to restore the assessee’s instant first and foremost substantive grievance back to the TPO in all these four years in very terms. Ordered accordingly. This first issue is accepted for statistical purposes.
Next comes the 2nd common issue of corporate guarantee fees “ALP” adjustments of Rs.3,47,45,600/-, Rs.4,25,70,000/-, Rs.5,69,60,000/- and Rs.4,35,40,000/-; assessment year wise; respectively. The assessee interalia submitted before us that a corporate guarantee does not form an international transactions as it does not result in any quantifiable benefits to the “AEs” being since it is a shareholding activity only than an international transaction falling under section 92B of the Act. Learned counsel further submitted that no comparison could be made between a corporate guarantee vis-a-vis bank guarantee. And that the learned lower authorities ought to have adopted a nominal commission rate as well. The Revenue has placed strong reliance on the impugned adjustment(s) made in the lower proceedings.
We have given our thoughtful consideration to rival pleadings qua the impugned corporate guarantee issue. The first and foremost question as to whether a corporate guarantee amounts to an international transactions or not stands decided in Revenue’s favour and against the assessee in PCIT Vs. Redington (India) Limited (2020) 122 taxmann.com 126 (Madras). Their lordships have considered Explanation to Section
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92B inserted by the Finance Act, 2012 to with effect from 01.04.2002 to hold that such a corporate guarantee indeed forms an international transaction with retrospective effect. We thus reject the assessee’s legal arguments and express our agreement with a learned lower authorities’ action treating the assessee’s corporate guarantee(s) as an international transaction in principle.
Next comes the issue of quantification of the impugned corporate guarantee commission adjustments. Both parties have quoted a catena of case law wherein various learned co-ordinate benches have adopted different rates. Faced with this situation, we deem it appropriate in these peculiar facts and circumstances that a lumpsum commission rate of 0.5% qua the extent of amount of assessee’s corporate guarantee(s) actually utilized only in all these four assessment years; would be just and proper. This second substantive ground is partly allowed in very terms.
Next comes the assessee’s third substantive grievance challenging correctness of the learned lower authorities’ action making “ALP” adjustments of Rs.82,61,182/-, Rs.1,38,06,050/-, Rs.74,71,053/- and Rs.2,51,81,348/-; pertaining to interest as trading receivables assessment year-wise; respectively. Both the learned representatives reiterated their respective stands regarding the impugned “ALP” adjustment made going by the bank’s short term deposit interest rates. So far as the legal question as to whether such interest on outstanding receivables forms an ‘international transaction’ or not, we note that the same also comes under Section 92B Explanation (I)(c) which has been already as applicable with retrospective effect (supra). We thus uphold the learned lower authorities’ impugned action interest on outstanding receivables as ‘international transactions’ to this limited extent.
ITA Nos. 186 to 189/Hyd/2021
Next comes the adjudication of the impugned issue on merits. We notice with the able assistance of both the parties that the TPO in these four assessment years has not given any comparable instance in the very segment whilst charging the impugned interest on the assessee's receivables since he had adopted the SBI's short term deposit rates only for benchmarking purposes. 9. The Revenue's endeavor before us supports the lower authorities' action on the pretext that such receivables are very much akin to a financial transaction to be benchmarked as per the SBI's short term lending or deposit rates. We find no merit in the Revenue's instant argument since Chapter -X of the Act is a special provision wherein each and every adjustment could only be made going by the uncontrolled market price of the transactions in the very segment; followed by benchmarking thereof as per the international currency "LIBOR" rates only. We, therefore, reverse the TPO's identical action in all these Assessment Years in view of the foregoing twin reasons regarding non- quantification of the impugned adjustment(s) segment wise and as per the LIBOR rates. We accordingly delete the impugned “ALP” adjustment in very terms.
Next comes the third substantive issue of “ALP” adjustments Rs.2,01,78,907/- and Rs.4,72,14,749/- pertaining to sale and purchase transactions in A.Ys. 2015-16 and 2016-17; respectively. The assessee’s first and foremost argument before us is that it had undergone a merger of Vivimid Labs (Alatur Pvt. Ltd); as approved in the hon’ble high court on 01.12.2016 w.e.f. 01.04.2014. It next prima facie emerges that the assessee had two units at Bidar, Karnataka and Alathur regarding which it had sought to submit a combined audited results benchmarking the sale and purchase transactions. Ld. CIT-DR’s case is that the lower
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authorities have rightly not considered the corresponding combined audited results as the ALP of the corresponding sales and purchases has to be seen transaction wise than at entity level in light of CIT Vs. Firestone International Pvt. Ltd. 378 ITR 558 (Bom). We find no merit in the Revenue’s instant arguments in principle as once the above stated unit of Vivimid Labs (Althur) Limited had stood merged w.e.f. 01.04.2015 and the assessee had made its sale - purchase transactions covered under section 92B of the Act to its Spain based “AE”, the learned lower authorities ought to have benchmarked the combined book results at segmental level pertaining to both these units only. We therefore direct the learned TPO to go by the assessee’s consolidated book results as per the combined audit report and proceed afresh for the purpose of necessary benchmarking as per law. Ordered accordingly. This 4th substantive ground is treated as allowed for statistical purposes.
Next common issue in all these four assessment years i.e. 2014- 15 to 2017-18 before us is that of depreciation disallowance involving figures of Rs.7,85,08,308/-, Rs.12,56,73,713/-, Rs.10,54,93,832/- and Rs.8,90,58,358/-; respectively. Learned counsel submitted during the course of hearing that the lower authorities have not considered even the closing figure of the corresponding fixed assets in A.Y. 2013-14 forming opening balance figure as on 01.04.2014. He further referred to the Assessing Officer’s remand report to this effect as well.
Mr. Sai placed a very strong reliance on the learned lower authorities’ discussion that the assessee itself had classified an amount of Rs.2,64,96,184/- as entitled for 15% depreciation than 100%; as the case may be. There is no rebuttal to the fact of the Assessing Officer having
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submitted the foregoing remand report as well as the issue regarding closing balance as on 31.03.2013 and the corresponding opening balancing figure as on 01.04.2013 relating to the first assessment year herein i.e. 2014-15. Faced with this situation, we are of the opinion that instant depreciation issue requires afresh adjudication at the Assessing Officer’s level in all these four assessment years so as to enable him to go by the foregoing closing figure(s) which cannot be disbursed as opening balance. We order accordingly. The 5th instant substantive grievance is treated as accepted for statistical purposes. It is made clear that the assessee shall be very much at liberty to file all the relevant details pertaining to its depreciation claims as per law.
Next comes the sixth identical issue of section 14A r.w.r 8D disallowance issue of Rs.2,15,24,816/-, Rs.4,73,52,898/-, Rs.2,63,75,111/- and Rs.2,05,29,751/-; assessment year-wise; respectively. Suffice to say, we do not find any exempt income to have been derived in all these four years. Case laws CIT Vs. Chettinad Logistics Pvt. Ltd [80 taxmann.com 221] (Madras), CIT Vs. Cortech Energy Pvt. Ltd. 223 Taxmann 130 (Guj) and Cheminvest Ltd. Vs. Cit (2015) 378 ITR 33 (Delhi) holds that section 14A r.w.r 8D disallowance comes into play only in relation to an assessee’s exempt income than having any independent application.
We have given our thoughtful consideration to Revenue’ stand placing reliance on the CBDT’s Circular No.5/2014 dt.11/02/2014. The above stated case law quoted at the assessee’s behest makes it clear that section 14A r.w.r 8D does not apply in the absence of exempt income. Coupled with this, the Finance Act, 2022 has inserted an Explanation to
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section 14A(1) that the impugned disallowance provision is applicable in absence of exempt income as well but with prospective effect only from 01.04.2022 onwards. We reiterate that we are in A.Ys. 2014-14 to 2017- 18 only. We thus find no merit in Revenue’s stand and direct the Assessing Officer to delete the impugned disallowance.
The assessee’s seventh substantive grievance in all the identical four instant appeals seeks to reverse the learned lower authorities’ action disallowing its sales, promotions and business marketing expenses of Rs.2,69,91,154/-, Rs.8,59,69,646/-, Rs.7,25,09,692/- and Rs.1,94,75,335/-; respectively. The DRP’s findings under challenge affirming the Assessing Officer’s action to this affect reads as under :
“2.11 Ground of objection No.11. Relating to disallowance of sales promotion expenses of Rs.2,69,91,154/-. Objection No.11.1. The Ld. AO erred in making the disallowance of sale promotion expenses for an amount of Rs.2,69,91,154/- based on suspicions and surmises without having any cogent reasoning. Objection No.11.1.1: The Ld. AO erred in making the addition to the income of the assessee only on presumption, without making the addition to the income of the assessee only on presumption, without bringing any corroborative evidence on record to substantiate the claim of alleged payment of sales expenditure. Objection No.11.1.2: The AO ought to have to appreciate the fact that assessee has maintained all the documents / vouchers / bills and same has also been submitted. Objection No.11.1.3: The AO erred in not considering the material and relevant evidence in respect of sale promotion expenses submitted by assessee during the scrutiny proceeding. Objection No.11.1.4: The AO ought to have appreciated the fact that the expenditure on account of Sales Promotion expenditure incurred is wholly and exclusively for the purpose of business.
ITA Nos. 186 to 189/Hyd/2021
Objection No.11.1.5: The AO ought to have to appreciate the fact that all the payments for the expenses are made through the banking channels. Objection No.11.1.6: The AO erred in making an assessment by disallowing the allowable expenditure incurred for the purpose of business which allowable expenditure u/s 37 of Income Tax Act. Objection No.11.1.7 : The Ld. AO erred in making the addition towards disallowance without there being any incriminating material found in this regard during the course of search proceedings. Objection No.11.1.8: The Ld. AO ought to have appreciated the fact that the books of account of the assessee company are audited and no discrepancies are found in the books of account for the year under consideration. Objection No.11.1.9: The AO erred in making the addition on the reason of non-production of the vouchers for expenditure by not appreciating the fact that all the information and books of account have been seized and retained by the department during the Search Proceeding. 2.11.1. Having considered the submissions, we note that the expenditure made by the assessee towards sale promotion has to be held to be in contravention of the Circular NO.5!2012 issued by the CBDT clearly applicable for the present assessment year. As per the explanation to Section 37(1) of the I.T. Act. any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession arid no deduction or allowance shall be made in respect of such expenditure, This provision Is In the statute w.e.t, 01.04.1962. The CBDT Circular cited supra brings to the notice of all concerned that expenditure Incurred towards freebies to doctors by the Pharma Agencies is disallowable u/s 37(1) or the I.T. Act as the Medical Council of India (statutory body) imposed prohibition on medical practitioners inter alia accepting gifts etc. from pharma agencies on 10.12.2009. Hence. any expenditure incurred w.e.f. 10.12.2009 towards freebies to doctors is disallowable u/s.37(1) of the I.T. Act. The validity of the CBDT Circular was upheld by the Himachal Pradesh High Court in Confederation of Indian Pharmaceutical Industry (SSI) Vs. CBDT [2014] 44 taxmann.com 365/[2013] 353 ITR 388. The expenses incurred by the Pharma Companies in providing free air travel stay and food in hotels, focal car conveyance etc. for prescribing medicines of the assessee is akin to giving commission and certainty in contravention of the public policy. Courses are arranged by many technical bodies such as Institute of Chartered Accountants, engineers where participants register themselves by paying a fee put here all the
ITA Nos. 186 to 189/Hyd/2021
expenses are borne by the Pharma companies on behalf of some doctors so as to encourage them to attend the seminar or conferences. This can be seen as the incentive to make them prescribe the medicines manufactured or marketed by them which has to be held to be not allowable in view of the CBDT Circular cited supra and section 37(1). Another argument put forward is that it is disallowable under the hands of the medical professionals but not in the hands of Pharma Companies. the intention of the prohibition imposed by the Medical council of India (statutory body) in exercise of its statutory powers amended the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 (the Regulations) on 10.12.2009 imposing a prohibition on the medical practitioner and their professional associations from taking any gift travel facility, hospitality, cash of monetary grant from the pharmaceutical and allied health sector industries and it was affirmed by CBDT in the form of the circular cited supra. This practice cann't stop unless these expenses are also disallowed in the hands of the pharma companies otherwise they will have to disclose the names of the doctors and full address so as the sum equivalent to value of freebies enjoyed by the aforesaid medical practitioner or professional associations is also taxable as business income or income from the other sources, as the case may be, depending on the facts of each case. The assessing officers of such medical practitioner or professional associations, once the details are furnished by the pharma companies, will be able to examine the same and take an appropriate action as per law. 2.11.2 It is also to be mentioned that in the case of CIT Vs. KAP Scan and Diagnostic Centre (P) Limited (2012) reported in 344 ITR 476 wherein admissibility of commission paid to doctors for referring patients for diagnosis was dealt, Hon’ble Punjab & Haryana High Court considered the Indian Medical Council (Professional Conduct Etiquette and Ethics) Regulations 2002 and concluded therefrom that such payment of commission was opposed to public policy and consequentially disallowed the expenditure. 2.11.3 Thus, we agree with the proposed disallowance and uphold the same as per the Circular No.5/2012 issued by the CBDT.”
We have given our thoughtful consideration to rival arguments qua the instant issue. The Revenue has placed strong reliance on the fact that the CBDT’s Circular No.5/2012 has clearly stipulated that such an expenditure in the nature of freebies to doctors is disallowable. The
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assessee’s arguments on the other hand are that it interalia deals in semi-finished products in the nature of special chemicals; which in turn, are used to produce the final product. And that it sells its products to the manufacturing companies where they are further processes in order to producing the final products. Learned counsel further that those finished products only are ultimately sold in market than the special chemicals in issue. We prima facie find merit in the assessee’s claim as the learned DRP’s findings have nowhere made it clear as to in what manner the assessee had offered freebies to the doctors which are covered under the Medical Council of India Act’s guidelines. We also take note of the hon’ble apex court’s recent landmark decision (2022) 135 taxmann.com 286 (SC) M/s. Apex Laboratories (P.) Ltd. Vs. DCIT upholding disallowance of freebies offered by pharmaceutical companies to doctors’ associations. We next note that there is not even a single observation in the DRP’s directions that the assess had incurred the impugned expenditure for any such freebies to doctors and their associations. We reiterate that it has not even manufactured the final products to be sold in market as well. We accordingly conclude that the impugned disallowance is not sustainable. The same stands deleted.
The assessee’s eighth substantive grievance in A.Ys. 2014-15 to 2015-16 and 2017-18 pleads that the learned lower authorities have erred in law and on facts in disallowing its section 35(2AB) weighted deduction claim of Rs.27,69,82,420/-, Rs.22,12,04,186/- and Rs.16,82,72,664/-; respectively. The DRP’s detailed discussion affirming the Assessing Officer’s action to this affect reads as follows : “2.5. Ground of objection No.5 : Relating to disallowance of weighted deduction u/s 35(2AB) of Rs.27,69,82,420/-. Objection No.5.1.1 The Ld. AO erred in disallowing the deduction claimed by the assessee under section 35(2AB) without appreciating the facts and explanations given by the assessee.
ITA Nos. 186 to 189/Hyd/2021
Objection No.5.1.2.: The Ld. AO erred in making the addition towards disallowance without there being any incriminating material found in this regard during the course of search proceedings. Objection No.5.1.3. : The Ld. AO erred in making the disallowance of deduction u/s 35(2AB) only on presumption, without bringing any corroborative evidence on record to substantiate the claim of alleged expenditure for which deduction is claimed u/s 35 (2AB). Objection No.5.1.4 : The Ld. AO ought to have appreciated the fact that the assessee had already obtained the recognition by the DSIR to the in-house Research and Development facility. Objection No.5.1.5. : The Ld AO erred in making disallowance u/s 35(2AB) without considering the Certificate of Registration (issued by Ministry Of Science and Technology) submitted by the assessee and the same valid up to 31.03.2019. Objection No.5.1.6 : The Ld AO erred in making the disallowance u/s 25(2AB) as the assessee has already applied for the From 3CL and 3CM and there is no fault on the part of the assessee. Objection No.5.1.7.: The Ld. AO erred in not considering the fact that it is an internal mechanism before two government departments on which assessee has no role of control except filing application with concerned authorities. Objection No. 5.1.8 : The Ld. AO erred in disallowing the claim just on the basis of procedural defect on the part of the governmental authorities even though assessee has fulfilled the basic requirement of registration with DSIR. Objection No.5.1.9: The Ld. AO erred in not considering the auditor’s certificate for the expenditure claimed u/s 35(2AB) and making unreasonable disallowance. Objection No.5.1.10: The Ld AO ought to have appreciated the fact that the assessee has complied with all the provisions of the Income Tax Act, 1961 to claim the deduction u/s 35(2AB). 2.5.1 The assessee has incurred an amount or Rs.13,84,91,210/- towards R & D expenditure and claimed deduction @200% of the expenditure incurred towards In-House scientific research and development u/s 35(2AB) of Rs.27.69,82,420/-. The AO has made disallowance of deduction u/s 35(2AB) for an amount of Rs.27,69,82,420/- stating that assessee has not produced Form 3CL and form 3CM. The assessee contended that the R & D facility was duly approved by the competent authority and relevant certificates were produced before the AO.
ITA Nos. 186 to 189/Hyd/2021
2.5.2 Having considered the submissions, we are of the view that the AO has to allow the deduction u/s 35 (2AB) @ 200% to the extent of approval given by the prescribed authority, i.e. Department of Scientific and Industrial Research (DSIR) as per form No 3CL. The matter needs to be examined by a competent authority specified by the Central Govt. namely, Department of Scientific and Industrial Research (DSIR) and they have to decide the amount allowable tor weighted deduction. There will not be any scope to decide all the expenditure to be allowed towards R&D as stipulated in the Act by any other authority. It is an admitted fact that the competent authority has not determined the quantum by issuing Form 3CL and Form 3 CM. Accordingly, we do not find merit in the contention of the assessee that weight deduction u/s 35(2AB) @ 200% to be granted based on the application made by the assessee to the competent authority. It is the duty of the assessee to obtain the approvals before claiming this deduction. Therefore, this objection is rejected.”
Suffice to say, the Revenue’s sole substantive argument before us in light of the DRP’s findings as well as case law Electronic Corporation of India 140 ITD 221 is that the impugned deduction claim has nowhere been quantified in light of Form 3CL and 3CM having not got approved by the prescribed authority i.e. DSIR. We find no merit in the Revenue’s arguments in light of this tribunal’s co-ordinate bench decision (2021) 187 ITD 214 (Bangalore) Provimi Animal Nutrition India Pvt. Ltd. Vs. PCIT deciding the very issue in assessee’s favour as under :
“9. Now adverting to the facts of the present case, we notice that the co-ordinate bench of Tribunal in the case of M/s Mahindra Electric Mobility Ltd vs. ACIT (ITA No.641/Bang/2017 dated 14-09-2018) has expressed the view that prior to 1.7.2016, Form 3CL had no legal sanctity and it is only w.e.f. 1.7.2016 with the amendment to Rule 6(7A)(b) of the Rules that the quantification of weighted deduction u/s 35(2AB) of the Act has significance. For the sake of convenience, we extract below the operative portion of the order passed by the Tribunal in the above said case:- "13. We have heard the rival submissions. The learned DR relied on the order of the AO/CIT(A). The learned counsel for the Assessee reiterated submissions as were made before the revenue authorities
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and placed reliance on some judicial precedents on identical issue rendered by various benches of ITAT and Hon'ble High Courts. 14. For AY 2012-13, the previous year is FY 2011-12 i.e., the period from 1.4.2011 to 31.3.2012. The facts on record go to show that the Assessee's in-house R & D facilities was approved by the DSIR, Govt. of India, Ministry of Science and Technology for AY 2012-13 vide their letter dated 20.5.2009, a copy of which is placed at Page-30 of the Assessee's paper book. The approval is for the period 1.4.2009 upto to 31.3.2012. Therefore, the condition for allowing deduction u/s.35(2AB) of the Act has been fulfilled by the Assessee. The claim of the revenue, however, is that the approval by the prescribed authority in form No.3CM is not final and conclusive and the quantum of expenditure on which deduction is to be allowed is to be certified by DSIR in form No.3CL. There is no statutory provision in the Act which lays down such a condition. We shall therefore examine what is Form No.3CL. 15. DSIR has framed guidelines for approval u/s.35(2AB) of the Act. The guidelines as on May, 2010 which is relevant for AY 2012-13, in so far as it is relevant for the present appeal, was as given below. (i) As per guideline 5 (iv) of the guidelines so framed, every company which has obtained an approval from the prescribed authority should also submit an undertaking as per Part C of Form No. 3CK to maintain separate accounts for each R&D centre approved under Section 35(2AB) by the Prescribed Authority, and to get the accounts duly audited every year by an Auditor as defined in sub- section (2) of section 288 of the IT Act 1961. (The statutory auditors of the Company should audit the R&D accounts. To facilitate this audit separate books of accounts for R&D should be maintained. Also, the statutory auditors should sign the auditors' certificate in the details required to be submitted as per annexure- IV of the guidelines to facilitate submission of Report in Form 3CL). (ii) As per guideline 5(vi) of the guidelines, the audited accounts for each year maintained separately for each approved centre shall be furnished to the Secretary, Department of Scientific & Industrial Research by 31st day of October of the succeeding year, along with information as per Annexure-IV of the Guidelines. (iii) As per guideline 5(ix) Expenditures, which are directly identifiable with approved R&D facility only, shall be eligible for the weighted tax deduction. However, expenditure in R&D on utilities which are supplied from a common source which also services areas of the plant other than R&D may be admissible, provided they are metered/measured and subject to certification by a Chartered Accountant.
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(iv) As per guideline 5 (x) Expenditure on manpower from departments, other than R&D centre, such as manufacturing, quality control, tool room etc. incurred on such functions as attending meetings providing advice / directions, ascertaining customer choice/response to new products under development and other liaison work shall not qualify for deduction under section 35(2AB) of I.T. Act 1961. (v) As per guideline 10 Documents required to be submitted by 31 st October of each succeeding year of approved period to facilitate submission of Report in Form 3CL (2 sets) are Complete details as per annexure-IV of DSIR guidelines. 16. The Assessee applied for issue of Form No.3CL to the appropriate authority on 24.3.2017, after the order of the CIT(A). The application so made by the Assessee is at page 43 to 65 of the Assessee's paper book. According to the Assessee, it has complied with all the requirements of the guidelines for issue of Form No.3CL, but the DSIR has issued Form No.3CL dated 5.4.2018 for AY 2014 & 15 & 2015-16 but no Form No.3CL was issued for AY 2012-13. Though there has been no communication to the Assessee in this regard, the learned counsel for the Assessee submitted that since the audited accounts were not submitted by 31st October of the succeeding AY, as is required under ITA No.2215/Bang/2019 M/s. Provimi Animal Nutrition India Pvt. Ltd., Bangalore Guideline 5 (vi), the Assessee's application would not have been considered by the DSIR. 17. Rule-6(7A)(b) of the Rules specifying the prescribed authority and conditions for claiming deduction u/s.35(2AB) of the Act has been amended by the Income Tax (10th Amendment) Rules, 2016 w.e.f. 1.7.2016, whereby it has been laid down that the prescribed authority, i.e., DSIR shall quantify the quantum of deduction to be allowed to an Assessee u/s.35(2AB) of the Act. Prior to such substitution, the above provisions merely provided that the prescribed authority shall submit its report in relation to the approval of in-house R & D facility in Form No.3CL to the DGIT days of granting approval. Therefore prior to 1.7.2016 there was legal sanctity for Form No.3CL in the context of allowing deduction u/s.35(2AB) of the Act. 18. The issue as to whether deduction u/s.35(2AB) of the Act can be denied for absence of Form No.3CL by the DSIR was subject matter of several judicial decisions rendered by various Benches of ITAT. (i) The Pune ITAT in the case of Cummins India Ltd. Vs. DCIT in ITA No.309/Pun/2014 for AY 2009-10 order dated 15.5.2018 had an occasion to consider a case where part of the claim for deduction u/s.35(2AB) of the Act was claimed supported by Form No.3CL but part of it was not supported by Form No.3CL. The Pune ITAT held as follows:-
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"45. The issue which is raised in the present appeal is that whether where the facility has been recognized and necessary certification is issued by the prescribed authority, the assessee can avail the deduction in respect of expenditure incurred on in-house R&D facility, for which the adjudicating authority is the Assessing Officer and whether the prescribed authority is to approve expenditure in form No.3CL from year to year. Looking into the provisions of rules, it stipulates the filing of audit report before the prescribed authority by the persons availing the deduction under section 35(2AB) of the Act but the provisions of the Act do not prescribe any methodology of approval to be granted by the prescribed authority vis-à-vis expenditure from year to year. The amendment brought in by the IT (Tenth Amendment) Rules w.e.f. 01.07.2016, wherein separate part has been inserted for certifying the amount of expenditure from year to year and the amended form No.3CL thus, lays down the procedure to be followed by the prescribed authority. Prior to the aforesaid amendment in 2016, no such procedure / methodology was prescribed. In the absence of the same, there is no merit in the order of Assessing Officer in curtailing the expenditure and consequent weighted deduction claim under section 35(2AB) of the Act on the surmise that prescribed authority has only approved part of expenditure in form No.3CL. We find no merit in the said order of authorities below. 46. The Courts have held that for deduction under section 35(2AB) of the Act, first step was the recognition of facility by the prescribed authority and entering an agreement between the facility and the prescribed authority. Once such an agreement has been executed, under which recognition has been given to the facility, then thereafter the role of Assessing Officer is to look into and allow the expenditure incurred on in-house R&D facility as weighted deduction under section 35(2AB) of the Act. Accordingly, we hold so. Thus, we reverse the order of Assessing Officer in curtailing the deduction claimed under section 35(2AB) of the Act by 6,75,000/-. Thus, grounds of appeal No.10.1, 10.2 and 10.3 are allowed." (ii) The Hyderabad ITAT in the case of M/S. Sri Biotech Laboratories India Ltd. Vs. ACIT ITA No.385/Hyd/2014 for AY 2009-10 order dated 24.9.2014 took the view (vide Paragraph-13 of the order) that when the Assessee's R & D facility is approved the deduction u/s.35(2AB) of the Act cannot be denied merely on the ground that prescribed authority has not submitted report in Form 3CL. 19. The question of allowing deduction u/s.35(2AB) of the Act was considered by the Hon'ble Delhi High Court in the case of CIT vs. Sadan Vikas (India) Ltd. (2011) 335 ITR 117 (Del) where AO refused to accord the benefit of the weighted deduction to the assessee under s. 35(2AB) on the ground that recognition and approval was given by the DSIR in February/September, 2006, i.e., in the next
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assessment year and, therefore, the weighted deduction cannot be allowed. The CIT(A) confirmed the order of the AO. The Tribunal held that the assessee would be entitled to weighted deductions of the aforesaid expenditure incurred by the assessee in terms of the s. 35(2AB) of the Act and in coming to this conclusion, the Tribunal relied upon the judgment of Gujarat High Court in CIT vs. Claris Lifesciences Ltd. 326 ITR 251 (Guj). In its decision the Hon'ble Gujarat High Court held that the cut-off date mentioned in the certificate issued by the DSIR would be of no relevance. What is to be seen is that the assessee was in indulging in R&D activity and had incurred the expenditure thereupon. Once a certificate by DSIR is issued, that would be sufficient to hold that the assessee fulfils the conditions laid down in the aforesaid provisions. The Hon'ble Delhi High Court followed the decision of the Hon'ble Gujarat High Court and upheld the decision of the Tribunal. The Hon'ble Delhi High Court quoted the following observations of the Hon'ble Gujarat High Court and agreed with the said view: "7. ... The lower authorities are reading more than what is provided by law. A plain and simple reading of the Act provides that on approval of the research and development facility, expenditure so incurred is eligible for weighted deduction. 8. The Tribunal has considered the submissions made on behalf of the assessee and took the view that section speaks of : (i) development of facility; (ii) incurring of expenditure by the assessee for development of such facility; (iii) approval of the facility by the prescribed authority, which is DSIR; and (iv) allowance of weighted deduction on the expenditure so incurred by the assessee. 9. The provisions nowhere suggest or imply that research and development facility is to be approved from a particular date and, in other words, it is nowhere suggested that date of approval only will be cut-off date for eligibility of weighted deduction on the expenses incurred from that date onwards. A plain reading clearly manifests that the assessee has to develop facility, which presupposes incurring expenditure in this behalf, application to prescribed authority, who after following proper procedure will approve the facility or otherwise and the assessee will be entitled to weighted deduction of any and all expenditure so incurred. The Tribunal has, therefore, come to the conclusion that on plain reading of s. itself, the assessee is entitled to weighted deduction on expenditure so incurred by the assessee for development of facility. The Tribunal has also considered r. 6(5A) and Form No. 3CM and come to the conclusion that a plain and harmonious reading of rule and Form clearly suggests that once facility is approved, the entire expenditure so incurred on development of R&D facility has to be allowed for weighted deduction as provided by s. 35(2AB). The Tribunal has also considered the legislative intention behind above enactment and observed that to boost up research and development facility in India, the legislature has
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provided this provision to encourage the development of the facility by providing deduction of weighted expenditure. Since what is stated to be promoted was development of facility, intention of the legislature by making above amendment is very clear that the entire expenditure incurred by the assessee on development of facility, if approved, has to be allowed for the purpose of weighted deduction." 20. From the above discussion it is clear that prior to 1.7.2016 Form 3CL had no legal sanctity and it is only w.e.f 1.7.2016 with the amendment to Rule 6(7A)(b) of the Rules, that the quantification of the weighted deduction u/s.35(2AB) of the Act has significance. In the present case there is no difficulty about the quantum of deduction u/s.35(2AB) of the Act, because the AO allowed 100% of the expenditure as deduction u/s.35(2AB)(1)(i) of the Act, as expenditure on scientific research. Deduction u/s.35(1)(i) and Sec.35(2AB) of the Act are similar except that the deduction u/s.35(2AB) is allowed as weighted deduction at 200% of the expenditure while deduction u/s.35(1)(i) is allowed only at 100%. The conditions for allowing deduction u/s.35(1)(i) of the Act and under Sec.35(2AB) of the Act are identical with the only difference being that the Assessee claiming deduction u/s.35(2AB) of the Act should be engaged in manufacture of certain articles or things. It is not in dispute that the Assessee is engaged in business to which Sec.35(2AB) of the Act applied. The other condition required to be fulfilled for claiming deduction u/s.35(2AB) of the Act is that the research and development facility should be approved by the prescribed authority. The prescribed authority is the Secretary, Department of Scientific Industrial Research, Govt. Of India (DSIR). It is not in dispute that the Assessee in the present case obtained approval in Form No.3CM as required by Rule 6 (5A) of the Rules. In these facts and circumstances and in the light of the judicial precedents on the issue, we are of the view that the deduction u/s.35(2AB) of the Act ought to have been allowed as weighted deduction at 200% of the expenditure as claimed by the Assessee and ought not to have been restricted to 100% of the expenditure incurred on scientific research. We hold and direct accordingly and allow the appeal of the Assessee.”
We adopt the foregoing detailed discussion mutatis mutandis to hold that once Rule 6(7A)(b) of the Income Tax Rules regarding quantification of section 35(2AB) deduction claim stands amended w.e.f. 01.07.2016 only, the assessee’s instant substantive grievance deserves to be accepted in very terms. Ordered accordingly. It is however made clear that the assessing authority shall be very much at liberty to verify the relevant facts in consequential computation(s).
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Th assessee’s nineth substantive ground in A.Y. 2017-18 is that the learned lower authorities have erred in law and on facts in making adjustment of Rs.8,32,33,392/- pertaining to capital gains on slump sales. Learned counsel’s first and foremost argument before us is that the corresponding sales in relation to which the impugned outstanding receivables are considered have already been offered to tax in preceding assessment years’ computation(s). The Revenue’s stand on the other hand is that the instant issue more requires a reconciliation than any substantive adjudication. Faced with this situation and in order to avoid double addition on the very same issue, we direct the learned Assessing Officer to verify the necessary factual position and ensure that the assessee does not suffer a double addition herein. This 9th substantive ground is accepted for statistical purposes.
The assessee’s 10th substantive grievance in A.Ys. 2015-16 and 2016-17 is that the learned lower authorities have erred in law and on facts in denying section 80IC deduction(s) of Rs.1,59,75,342/- and Rs.1,67,71,619/- respectively pertaining to its Haridwar Unit. Learned CIT-DR vehemently contended during the course of hearing that a return filed u/s 153A ought not to include a fresh claim of deduction under Chapter VI of the Act in light of section 80IC requiring a return to be filed u/s 139(1) of the Act. We find no merit in Revenue’s stand in light of the tribunal’s decision in M/s.GKC Projects Limited, Hyderabad (ITA Nos.1029 to 1032/Hyd/2018 order dt.22.02.2022). 21. We have given our thoughtful consideration to the foregoing rival pleadings and find no merit in the Revenue’s stand in principle. We make it clear that the assessee had not claimed the impugned Section
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80-IC deduction relief in its original returns filed u/s.139(1) of the Act. There is further no dispute that the department had carried out the search in issue on 09.11.2016 in assessee’s case wherein the time limit for filing Section 139(1) return for including Section 80-IA deduction had very well elapsed. The Assessing Officer thereafter initiated Section 153A proceedings thereby asking for assessee’s returns.
We now proceed to deal with the Revenue’s issue (s) raised herein as to whether the assessee could raise a fresh claim of Section 80-IC deduction in a return filed u/s.153(1)(a) of the Act for the first time or not even if it had chosen not to do so in Section 139(1) regular return submitted before search. We wish to reiterate here that the Revenue’s case strongly relies upon Section 80-IA r.w.s.80AC of the Act inter alia stipulating that “where the assessee fails to make a claim in his return of income for any deduction …….., no deduction shall be allowed to him thereunder” and that “no such deduction shall be allowed to him unless he furnishes a return of his income for such assessment year on or before the due date specified under sub-section(1) of Section 139” ; respectively. 23. We next note that crux of the instant issue lies in non-obstante clauses in Section 153A itself wherein the legislature has made it clear that “Notwithstanding anything contained in Section 139, Section 147, Section 148, Section 149, 151 and Section 153 …………”. The same sufficiently suggests that once Section 139 itself is not applicable in an instance involving Section 153A proceedings, all other consequences flowing therefrom in case of an assessee having not claimed Section 80- IA deduction in section 139(1) return are deemed to have been rendered non-operative. Coupled with this, hon'ble jurisdictional high court in Gopal Lal Bhadruka Vs. DCIT (2012) (346 ITR 106) (AP HC) has also made it clear that an Assessing Officer framing Section 153A assessment can very well take note of all other material apart from the incriminating and
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seized one during the course of search for the purpose of framing assessment u/s.153A as he supposed to total income. 24. This tribunal’s co-ordinate bench’s order in M/s.KNR Constructions Ltd. Vs. DCIT in ITA No.946 to 948/H/2015, dt.16-10-2015 has also settled the issue now that the Hon'ble Rajasthan high court’s decision in Jai Steel (India) Vs. ACIT (2013) [259 CTR 281] (Rajasthan) (supra) nowhere dealt with instance of a deduction claim under Chapter- VI as the assessee therein had raised a general fresh claim of expenditure of sale tax only. The very factual position continues in EBR Enterprises Vs. Union of India (2019) [107 taxmann.com 220 (Bombay)] (supra) as well wherein the hon'ble high court had come across an issue of Section 80-IA deduction claim, not involving Section 153A proceedings, as are the facts before us. It rather emerges that their lordships yet another recent decision in PCIT Vs. JSW Steel Ltd. (2020) [115 taxmann.com 165 (Bombay) has taken note of the foregoing non-obstante clauses in line in Section 153A(supra) in holding that an assessee in Section 153A return can very well raise such a new claim of deduction. 25. Mr.Sai at this stage sought to distinguish the foregoing judicial precedent that it only deals with an instance of “abated” assessment wherein the Assessing Officer is empowered to decide all the issues emanating therefrom even other than those confined to a search assessment. We find no merit in the Revenue’s instant technical argument as Section 153A nowhere draws any distinction of an “abated” or “un-abated” assessment so far as an assessee’s eligibility to raise a new deduction claim under Chapter-VI therein is concerned. We thus uphold the CIT(A)’s lower appellate findings in principle.
We therefore adopt the foregoing detailed discussion mutatis mutandis to accept the assessee’s foregoing legal arguments in principle
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and direct the learned Assessing Officer to decide its corresponding section 80IC claim in light of all the statutory conditions as per law after necessary factual verification. Ordered accordingly.
The assessee’s 11th substantive grievance in A.Y.s 2015-16 and 2016-17 seeks to reverse the learned lower authorities action treating its subsidy amounts received; is the nature of industrial promotions assistance, under the West Bengal Incentive Scheme, 2000, as revenue items than capital receipts. The Revenue’s case in light of hon’ble apex court landmark decision in (1997) 228 ITR 253 (SC) Sahney Steel and Press Works Limited Vs. CIT is that the lower authorities have rightly treated the impugned sum as a revenue item assessable to tax. We find no merit in Revenue’s instant arguments as the tribunal’s latest decision DCIT Vs. M/s. Ankit Metal and Pvt. Ltd. (2021) 92 ITR 189 (Trib) (Kal) holds the very incentive scheme as giving rise to a capital receipt not liable to tax as follows :
“28. We have heard both the parties. It is noted that the State of West Bengal had formulated an Industrial Policy Scheme expressly for the purpose of attracting private investment in the State of West Bengal in the specified areas. To promote industrialization and generation of employment in the State, the Government offered various incentives/ subsidies including 'Industrial Promotion Assistance' ('IPA') in the form of concessional power tariffs by way of power subsidy and refund of 75% of sales tax paid on sale of goods within the State of West Bengal. The subsidy was thus directed towards industrial development in the State. The purpose/object of the West Bengal Incentive Scheme was for encouraging the setting up of new industrial units and expansion of existing industrial units pursuant to which IPA was to be paid in form of power subsidy, sales tax/VAT subsidy to the assessee. 29. The Hon'ble Apex Court in their judgment in the case of CIT vs. Ponni Sugar & Chemicals Ltd. (306 ITR 392) has held that whether the subsidy or grant given by the Government is in the nature of capital or revenue will have to be judged and decided with reference to the object and the purpose for which the subsidies are granted and not the form and manner of payment.
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From the given facts of the present case, especially to the Gazette Notification of the West Bengal Government the Incentive for Promotion of Industries Scheme 2004, (herein after referred to as the Scheme) wherein details of the Scheme is found placed from page 143 to 171 of PB and from a perusal of the same it is noted that the intent and object behind the industrial promotion assistance [herein after referred to as IPA] extended by the State under their Industrial Policy Scheme was to encourage the assessee to set up a new unit or expand the existing unit for overall economic development of the State and not to enable the assessee to run the business more profitably. In this case the assessee had invested in Sponge Iron Plant and Mega Project (Induction manufacturing units Sponge Iron, Power, Billet) as per the Scheme, which made the assessee eligible for subsidy / sanction under the scheme given by West Bengal Industrial Development Corporation dated 5 January 2010 found placed at page 172 PB and Registration and Eligibility Certificate as per the Scheme is found placed at pages 173 to 183 PB] under the Scheme taken out by the Government of West Bengal for making 'capital investment' in the State. We find that the intent and purpose of the Industrial Policy of State of West Bengal, 2004 was for establishing/substantial expansion of manufacturing units located in backward areas of State of West Bengal and generate employment for the local people, and therefore the nature of subsidy received under the State Industrial Scheme was in the capital field not exigible to tax. This subsidy was remitted through two modes viz., power subsidy and sales tax/VAT subsidy. Hence, applying the purpose test, both these subsidies received by the assessee was for undertaking industrialization in the State and is thus found to be in capital field and the details of the Scheme which has been re- produced by the Ld CIT(A) in respect of power subsidy from pages 24 to 29 of his impugned order and in respect of VAT subsidy from pages 29 to 31 of his impugned order, has been taken in to account for our decision, which is not repeated for the sake of brevity. 31. Thus we find that the object of the West Bengal Incentive Scheme, 2004 was envisaged for encouraging the setting up of new industrial units and expansion of existing industrial units pursuant to which IPA in form of VAT subsidy and power subsidy was granted to the assessee. 32. In view of the above facts, we find that the incentive in the form of sales tax/VAT subsidy and power subsidy , have been granted for setting up new units in the States of West Bengal which lagged behind in industrial development for development of industries and generation of employment opportunities. The object of the assistance was not to enable the assessee to run the business more profitably but encourage them to set up a new unit or expand the existing unit for overall economic development of the State and so we concur/endorse this finding of Ld CIT(A) on this issue to the same effect.
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We find that this particular issue is now no longer res integra in light of the decision of the Hon'ble Supreme Court in the case of CIT Vs Chaphalkar Brothers (400 ITR 279) wherein the Supreme Court after analysing the ratio laid down in their earlier judgments in the cases of CIT vs Rajaram Maize Products(supra), M/s Sahney Steel & Press Works Ltd. vs. CIT (supra) and CIT vs. Ponni Sugar & Chemicals Ltd. (supra) held that the subsidies granted under the State Industrial Scheme to accelerate industrial development and generate employment in the State, is capital in nature. The relevant extracts of the judgment are as follows: "21. What is important from the ratio of this judgment is the fact that Sahney Steel was followed and the test laid down was the "purpose test". It was specifically held that the point of time at which the subsidy is paid is not relevant; the source of the subsidy is immaterial; the form of subsidy is equally immaterial.
Applying the aforesaid test contained in both Sahney Steel as well as Ponni Sugar, we are of the view that the object, as stated in the statement of objects and reasons, of the amendment ordinance was that since the average occupancy in cinema theatres has fallen considerably and hardly any new theatres have been started in the recent past, the concept of a Complete Family Entertainment Centre, more popularly known as Multiplex Theatre Complex, has emerged. These complexes offer various entertainment facilities for the entire family as a whole. It was noticed that these complexes are highly capital intensive and their gestation period is quite long and therefore, they need Government support in the form of incentives qua entertainment duty. It was also added that government with a view to commemorate the birth centenary of late Shri V. Shantaram decided to grant concession in entertainment duty to Multiplex Theatre Complexes to promote construction of new cinema houses in the State. The aforesaid object is clear and unequivocal. The object of the grant of the subsidy was in order that persons come forward to construct Multiplex Theatre Complexes, the idea being that exemption from entertainment duty for a period of three years and partial remission for a period of two years should go towards helping the industry to set up such highly capital intensive entertainment centers. This being the case, it is difficult to accept Mr. Narasimha's argument that it is only the immediate object and not the larger object which must be kept in mind in that the subsidy scheme kicks in only post construction, that is when cinema tickets are actually sold. We hasten to add that the object of the scheme is only one -there is no larger or immediate object. That the object is carried out in a particular manner is irrelevant, as has been held in both Ponni Sugar and Sahney Steel.
Mr. Ganesh, learned Senior Counsel, also sought to rely upon a judgment of the Jammu and Kashmir High Court in Shree Balaji Alloys v. CIT [2011] 9 taxmann.com 255/198 Taxman 122/ 333 ITR
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While considering the scheme of refund of excise duty and interest subsidy in that case, it was held that the scheme was capital in nature, despite the fact that the incentives were not available unless and until commercial production has started, and that the incentives in the form of excise duty or interest subsidy were not given to the assessee expressly for the purpose of purchasing capital assets or for the purpose of purchasing machinery.
After setting out both the Supreme Court judgments referred to hereinabove, the High Court found that the concessions were issued in order to achieve the twin objects of acceleration of industrial development in the State of Jammu and Kashmir and generation of employment in the said State. Thus considered, it was obvious that the incentives would have to be held capital and not revenue. Mr. Ganesh, learned Senior Counsel, pointed out that by an order dated 19.04.2016, this Court stated that the issue raised in those appeals was covered, inter alia, by the judgment in Ponni Sugars & Chemicals Ltd. case (supra) and the appeals were, therefore, dismissed.
We have no hesitation in holding that the finding of the Jammu and Kashmir High Court on the facts of the incentive subsidy contained in that case is absolutely correct. In that once the object of the subsidy was to industrialize the State and to generate employment in the State, the fact that the subsidy took a particular form and the fact that it was granted only after commencement of production would make no difference." (emphasis supplied) 34. It is further noted that this exact same issue regarding taxability of subsidy received under the West Bengal State Industrial Scheme has been adjudicated in assessee's own case for the earlier A.Y. 2010-11. In the instant case, the Hon'ble jurisdictional Calcutta High Court (supra) upheld the order of this Tribunal holding the subsidies to be capital in nature and therefore not exigible to income- tax. The relevant extracts of the judgment are as follows:- "..We have heard both sides at length on the issues involved in the instant appeal, considered their submission and perused the relevant record. The first issue which requires adjudication is whether incentives 'Interest subsidy' and 'Power subsidy' received by the assessee under the schemes in question are capital receipt not liable to the taxed or 'Revenue receipt' and is liable to be taxed and the key question which arises for determination of this issue is what is the character of the incentive subsidies under the said schemes in question and in judging the character of incentives, the "purpose test" is a great factor. 20. On this issue decision in the case of Sahney Steel and Press Works Ltd. (supra) relied upon by the revenue is a leading decision on the test or determining the nature and character of a subsidy under any scheme as to when it is to be treated as 'capital receipt' or
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'revenue receipt' in the hands of the assessee and considering this decision of Sahney Steel & Press Works Ltd. (supra) another leading decision on this proposition of law is Ponni Sugars and Chemicals Ltd. (supra). Law laid down in these two decisions have been uniformly followed in series of decisions of the Hon'ble Supreme Court, our High Court and other High Courts which assessee has relied as referred above on this issue. The following paragraph of the judgment delivered by the Hon'ble Supreme Court in Ponni Sugars & Chemicals Ltd. (supra) case reads thus (page 400): "The importance of the judgment of this court in Sahney Steel case lies in the fact that it has discussed and analysed the entire case law and it has laid down the basic test to be applied in judging the character of a subsidy. That test is that the character of the receipt in the hands of the assessee has to be determined with respect to the purpose for which the subsidy is given. In other words, in such cases, one has to apply the purpose test. The point of time at which the subsidy is paid is not relevant. The source is immaterial. The form of subsidy is immaterial. The main eligibility condition in the scheme with which we are concerned in this case is that the incentive must be utilized for repayment of loans taken by the assessee to set up new units or for substantial expansion of existing units. On this aspect there is no dispute. It the object of the subsidy scheme was to enable the assessee to run the business more profitable then the receipt is on revenue account. On the other hand, if the object of the assistance under the subsidy scheme was to enable the assessee to set up a new unit or to expand the existing unit then the receipt of the subsidy was on capital account. Therefore, it is the object for which the subsidy assistance is given which determines the nature of the incentive subsidy. The form or the mechanism through which the subsidy is given are irrelevant." 21. A perusal of the judgments in Sahney Steel & Press Works Ltd. (supra) and Ponni Sugars & Chemicals Ltd. (supra) therefore, reveals that the apex court had applied the above quoted dictum to determine the purpose, which the two schemes had intended to achieve by the incentive subsidies, permissible under the schemes in question in those cases. 22. It was, therefore, in the context of respective subsidy incentive schemes in the two cases, that the subsidy in Sahney Steel & Press Works Ltd. (supra) was held to be revenue receipt whereas the subsidy in Ponni Sugars & Chemicals Ltd. (supra) was held as capital receipt." 23. On a careful look into these decisions it appears that the law is settled that the nature of incentives/subsidies granted by the Government under any Scheme to any enterprise would totally depend upon the salient features of the said Scheme. The purpose for which the incentive/subsidy is given under the Scheme is the
ITA Nos. 186 to 189/Hyd/2021
determining factor to lay down the nature of the incentive/subsidy. If an incentive/subsidy is given as a general assistance to the assessee to carry on his business or trade, it would be an operational incentive and thus a trading receipt in the hands of the assessee. However if the object of the subsidy, irrespective of its source, is to enable the assessee to acquire new plant and machinery or for further expansion of its manufacturing capacity or for setting up a new unit, the entire subsidy must be held to be a capital receipt. The incentives/subsidies, depending upon the purpose for which they are granted, fall under two categories namely : (i) Operational incentives/subsidies which are given to the assessee to carry on his business or trade and; (ii) Fixed capital incentives/subsidies which are given to the assessee to set up a new unit or to expand its existing unit. 24. On perusal of the contents of the relevant portion under the incentive subsidy schemes in question we found that in the case of the assessee, the State Government under the West Bengal Incentive Scheme, 2000, and 'West Bengal Incentive to Power Intensive Industries Scheme, 2005', had actually granted the subsidy with the sole intention of setting up new industry and attracting private investment in the state of West Bengal in the specified areas in the present case Bankura which is industrially backward hence the same was of the nature of non- taxable Capital receipt. Thus according to the 'purpose test' laid out by the Hon'ble Supreme Court, various and High Courts including our Court the aforesaid subsidy should be treated as capital receipt in spite of the fact that computation of 'Power subsidy' is based on the power consumed by the assessee. It is well established from submission of the assessee as enunciated above that once the purpose of a subsidy is established; the mode of computation is not relevant as held in the decisions of the Hon'ble Supreme Court in the case of Sahney Steel & Press Works Ltd. (supra), CIT v. Ponni sugars & Chemicals Ltd. (supra) and the decision of our High Court in case of Rasoi Ltd. (supra) against which SLP has been dismissed. The mode of computation/form of subsidy is irrelevant. The mode of giving incentive is re-imbursement of energy charges. The nature of subsidy depends on the purpose for which it is given. Hence the assessee draws support from the decisions already discussed earlier as the same principle will apply here. Thus, the entire reason behind receiving the subsidy is setting up of plant in the backward region of West Bengal, namely, Bankura. 25. Accordingly we hold the aforesaid incentive subsidies are 'capital receipts' and is not an 'income' liable to be taxed in relevant assessment year 2010-11 on the basis of discussion made above and further taking into consideration the definition of Income under Section 2(24) of the Income Tax Act, 1961, where sub-clause (xviii) has been
ITA Nos. 186 to 189/Hyd/2021
inserted including 'subsidy' for the first time by Finance Act, 2015 w.e.f. April, 2016 i.e assessment year 2016-17. The amendment has prospective effect and had no effect on the law on the subject discussed above applicable to the subject assessment years. 26. Now the second issue which requires adjudication is as to whether the aforesaid incentive subsidies received by the assessee from the Government of West Bengal under the schemes in question are to be included for the purpose of computation of book profit under Section 115 JB of the Income Tax Act, 1961 as contended by the revenue by relying on the decision in the case of AppolloTyres Ltd. (supra). 27. In this case since we have already held that in relevant assessment year 2010- 11 the incentives 'Interest subsidy' and 'Power subsidy' is a 'capital receipt' and does not fall within the definition of 'Income' under Section 2(24) of Income Tax Act, 1961 and when a receipt is not on in the character of income it cannot form part of the book profit under Section 115JB of the Act, 1961. In the case of AppolloTyres Ltd. (supra) the income in question was taxable but was exempt under a specific provision of the Act as such it was to be included as a part of the book profit. But where a receipt is not in the nature of income at all it cannot be included in book profit for the purpose of computation under Section 115JB of the Income Tax Act, 1961. For the aforesaid reason, we hold that the interest and power subsidy under the schemes in question would have to be excluded while computing book profit under Section 115 JB of the Income Tax Act, 1961. 35. Gainful reference may also be made to the following observations made by the Hon'ble jurisdictional Calcutta High Court in the case of CIT Vs. Rasoi Ltd. (supra) holding that the subsidy in the form of VAT remission received under the West Bengal Industrial Scheme was capital in nature and hence not liable to tax. 14A. From the objects and the reasons of the aforesaid scheme as well as the entitlement as indicated in section 3 mentioned above, it is clear that the Government has decided to grant the subsidy by way of financial assistance to tide over the period of crisis for promotion of the industries mentioned in the scheme which have the manufacturing units in West Bengal and which are in need of financial assistance for expansion of their capacities, modernization, and improving their marketing capabilities and such subsidy for the financial year in question was only for that year and was equivalent to ninety per centum of the amount of sales tax paid by the ITA No. 1493/Kol/2019, M/s Ankit Metal & Power Ltd.., AY 2013-14 Industry concerned, for any quarter under the Sales Tax Act in respect of sales of such goods.
ITA Nos. 186 to 189/Hyd/2021
We find that the principles laid down in the case of Sahney Steel & Press Works Ltd. (supra), relied upon by Mr. Nizamuddin has been explained by the Supreme Court in a subsequent decision in the case of Ponni Sugars & Chemicals Ltd. (supra), relied upon by Mr. Poddar in the following terms : "In our view, the controversy in hand can be resolved if we apply the test laid down in the judgment of this Court in Sahney Steel and Press Works Ltd. In that case, on behalf of the assessee, it was contended that the subsidy given was up to 10 per cent of the capital investment calculated on the basis of the quantum of investment in capital and, therefore, receipt of such subsidy was on capital account and not on revenue account. It was also urged in that case that subsidy granted on the basis of refund of sales tax on raw materials, machinery and finished goods were also of capital nature as the object of granting refund of sales tax was that the assessee could set up new business or expand his existing business. The contention of the assessee in that case was dismissed by the Tribunal and, therefore, the assessee had come to this Court by way of a special leave petition. It was held by this Court on the facts of that case and on the basis of the analyses of the Scheme therein that the subsidy given was on revenue account because it was given by way of assistance in carrying on of trade or business. On the facts of that case, it was held that the subsidy given was to meet recurring expenses. It was not for acquiring the capital asset. It was not to meet part of the cost. It was not granted for production of or bringing into existence any new asset. The subsidies in that case were granted year after year only after setting up of the new industry and only after commencement of production and, therefore, such a subsidy could only be treated as assistance given for the purpose of carrying on the business of the assessee. Consequently, the contentions raised on behalf of the assessee on the facts of that case stood rejected and it was held that the subsidy received by Sahney Steel could not be regarded as anything but a revenue receipt. Accordingly, the matter was decided against the assessee." [Emphasis supplied] In the aforesaid case, it was held that if the object of the Subsidy Scheme was to enable the assessee to run the business more profitably the receipt is on revenue account. On the other hand, if the object of the assistance under the Subsidy Scheme was to enable the assessee to set up a new unit or to expand the existing unit the receipt of the subsidy was on capital account. Therefore, the Court proceeded, it is the object for which the subsidy/assistance is given which determines the nature of the incentive subsidy. The form of the mechanism through which the subsidy is given is irrelevant. 16. In the case before us, the object of the subsidy is for expansion of their capacities, modernization, and improving their marketing capabilities and, thus, those are for the assistance on capital account. Similarly, merely because the amount of subsidy was equivalent to 90 per cent of the sales tax paid by the beneficiary does not imply that
ITA Nos. 186 to 189/Hyd/2021
the same was in the form of refund of sale tax paid. As pointed out by the Supreme Court in the case of Senairam Doongarmall v. CIT AIR 1961 SC 1579, it is the quality of the payment that is decisive of the character of the payment and not the method of the payment or its measure, and makes it fall within capital or revenue. Thus, in the case before us, the amount paid as subsidy was really capital in nature. 36. For the reasons as discussed above and respectfully following the above cited judgments of the Hon'ble Supreme Court and jurisdictional Calcutta High Court (supra), we accordingly uphold the Ld. CIT(A)'s action of treating the aforesaid incentive subsidies as 'capital receipts' and therefore not in the nature of 'income' liable to be taxed in relevant AY 2013-14. Ground Nos. 3 & 4 of the Revenue therefore stands dismissed.”
We apply the above detailed discussion mutatis mutandis and hold that the learned lower authorities have erred in law and on facts in treating the assessee’s impugned subsidy receipts as revenue items. The same is directed to be deleted.
We further note that the assessee’s former three years 2014-15 to 2016-17 also raise an identical legal ground challenging validity of the impugned assessments for want of incriminating material found or seized during the course of search. It prima facie emerges from a perusal of these appeals ITA Nos. 186 to 188/Hyd/2021 that the assessee had interalia not filed a valid return submitted no return and furnished a valid return before search in former three appeals, respectively. There is no further denial to the fact that the DRP has prepared an annexure of so- called seized documents in A.Y. 2016-17’s directions which turn out to be the assessee’s regular books of accounts and documents only. That being the case, we find that the tribunal’s order in assesses’s case ITA Nos.184 and 185/Hyd/2021 for preceding two assessment years 2012-13 and 2013-14 dated 07.04.2022 has quashed the assessment proceedings on the very issue as follows :
ITA Nos. 186 to 189/Hyd/2021
“4. We have given our thoughtful consideration to rival pleadings and find no merit in Revenue’s stand. We first of all deem it appropriate to take note of certain basic facts. The assessee had interalia filed its section 139(1) returns dt.29.09.2012 and 30.11.2013 which followed the Transfer Pricing Officer’s “TPO” section 92CA(3) orders dt.29.01.2016 and 31.10.2016; respectively. Suffice to say, the impugned search action took place thereafter on 09.11.2016 followed by the DRP’s directions dt.20.12.2016 in A.Y. 2012-13. Both these assessments thereafter stood treated as “abated” ones in light of section 153A(1) 2nd proviso and the Assessing Officer initiated section 153A proceedings followed by yet another assessments including reference made to the TPO as well as draft assessment and objections filed before the DRP which duly stand disposed off as per law. 5. We wish to observe in light of the case laws quoted at the assessee’s behest as well as after taking into consideration the hon’ble apex court’s landmark decision in CIT Vs. Sinhaghad Technical Educational Society (2017) 84 taxmann.com 290 (SC) that no such proceedings initiated u/s 153A of the Act sustainable in law for want of incriminating material found or seized during the course of search. We make it clear that although the Revenue has vehemently argued that there indeed exists sufficient seized material in light of the annexures attached with the DRP’s directions (supra), a perusal thereof sufficiently indicates that this so called material parts already formed of the assessee’s books which had already been considered in both the corresponding scrutiny assessments pending on the date of search. This tribunal’s Special Bench’s decision in All Cargo Global Logistics Ltd. Vs. DCIT (2012) 137 ITD 287 (ITAT-Mum) (SB) holds that incriminating material is that material which is found during the course of search and not produced in the course of original assessment and undisclosed income or property disclosed during the course of search, as the case may be. We find from a perusal of the case(s) records and more particularly in light of the DRP’s compilation of the alleged seized material it only includes the assessee’s expenses / claims or EBIDTA details etc. which could hardly be termed as anything incriminating in the foregoing terms. 6. Mr. Sai referred to Gopal Lal Bhadruka Vs. DCIT 346 ITR 106 (AP) that an assessing authority could also consider any other material during the search assessment. The instant plea hardly carries any substance since the question framed therein was not regarding lack of incriminating material but the Assessing Officer’s jurisdiction to take all other material into account in a search assessment which is not the issue before us. We thus accept the assessee’s instant legal ground to quash both these assessments thereby rendering all other pleadings on merits to have been become infructuous. Ordered accordingly.”
ITA Nos. 186 to 189/Hyd/2021
We therefore decline the assessee’s instant legal ground in A.Y.s. 2014-15 and 2015-16 and accept the same in A.Y. 2016-17’s appeal i.e. ITA 188/Hyd/2021. The impugned assessment stands quashed in this last assessment year i.e. 2017-18 therefore. 30. The assessee’s 12th substantive grievance in A.Y. 2016-17 is that the learned lower authorities have erred in law and on facts in making section 43B disallowance of Rs.19,17,38,828/- despite the fact that the DRP’s corresponding directions deciding its objections had granted substantive relief. That being the case, we direct the learned Assessing Officer to verify the necessary factual position and allow the impugned relief as per law in light of DRP’s directions which are binding on him u/s 144C(13) of the Act. This 12th substantive grievance is accepted subject to the assessing authority’s factual rectification in above terms. No further ground has been pressed before us.
To sum up, the assessee’s three appeals ITA Nos.186 to 187 and 189/Hyd/2021 are partly allowed and ITA No.188/Hyd/2021 is allowed in foregoing terms. Its corresponding stay application Nos. 36 to 39/Hyd/2021 stand rendered infructuous in very terms. A copy of this common order be placed in respective case files. Order pronounced in the Open Court on 12th April, 2022.
Sd/- Sd/- (LAXMI PRASAD SAHU) (S.S. GODARA) ACCOUNTANT MEMBER JUDICIAL MEMBER
Hyderabad, dated 12th April, 2022. TYNM/sps
ITA Nos. 186 to 189/Hyd/2021
Copy to: S.No Addresses 1 M/s. Vivimed Labs Limited, C/o. P. Murali & Co., Chartered Accountants, 6-3-655/2/3, Somajiguda, Hyderabad – 5000082. 2 The Asst.Commissioner of Income Tax, Central Circle 2(3), Hyderabad. 3 The DCIT (TPO)-3, Hyderabad. 4 The Dispute Resolution Panel – 1, Bengaluru 5 DR, ITAT Hyderabad Benches 6 Guard File By Order